BILL ANALYSIS �
AJR 40
Page 1
ASSEMBLY THIRD READING
AJR 40 (Skinner)
As Introduced May 15, 2012
Majority vote
BANKING & FINANCE 8-2
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|Ayes:|Eng, Charles Calderon, |
| |Fletcher, Fuentes, Gatto, |
| |Roger Hern�ndez, Lara, |
| |Torres |
| | |
|-----+--------------------------|
|Nays:|Harkey, Morrell |
| | |
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SUMMARY : Urges the Federal Housing Finance Agency (FHFA), and
specifically its director, Edward DeMarco, to immediately allow
the Federal National Mortgage Association (Fannie Mae) and the
Federal Home Loan Mortgage Corporation (Freddie Mac) to offer
principal reductions to homeowners who owe more than their homes
are worth. Specifically, this resolution :
1)Makes the following findings and declarations:
a) Since 2008, more than half a million Californians have
lost their homes to foreclosure and another half million
homes are currently in foreclosure or are at imminent risk
of foreclosure;
b) There are over two million California homes currently
"underwater" where property owners owe more than what the
home is worth and collectively the value of these homes is
over $196 billion;
c) Foreclosures too often become vacant, boarded-up
hazards, lower surrounding property values, increase
criminal activity in neighborhoods, and discourage economic
development and investment in communities;
d) The wave of foreclosures that has already hit California
substantially decreased tax revenue, which led to budget
deficits, increased unemployment, and billions of dollars
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in cuts to schools, health services, and other vital
services;
e) Fannie Mae and Freddie Mac, the two companies that
control over one-half of the home loans in the United
States, and specifically over 60% of California mortgages;
f) The director of the FHFA, Edward DeMarco, has
steadfastly opposed allowing Fannie Mae or Freddie Mac to
offer principal reductions to homeowners who owe more on
their homes than what they are worth;
g) On February 9, 2012, Attorney General Kamala Harris
announced that California will join a national servicing
settlement that is estimated to provide up to $40 billion
in benefits to borrowers across the country and much of
these benefits include a program of principal reductions;
h) Fannie Mae and Freddie Mac refused to participate in the
national settlement agreement, meaning more than one-half
of the home loans in the country will see no relief from
this agreement;
i) Many economists and housing experts agree that principal
reductions are the most helpful tool for limiting the
number of foreclosures;
j) By refusing to allow principal reductions, the FHFA is
ensuring that tens of millions of homeowners nationwide
will continue to owe more on their home loans than what
their homes are worth; and,
aa) Allowing principal reductions for Fannie Mae and Freddie
Mac mortgages could deter another wave of costly
foreclosures nationwide.
FISCAL EFFECT : None
COMMENTS : The Housing and Economic Recovery Act of 2008 (HERA),
which created FHFA, granted the Director of FHFA discretionary
authority to appoint FHFA conservator or receiver of the Fannie
Mae and Freddie Mac (Enterprises) "for the purpose of
reorganizing, rehabilitating, or winding up the affairs of a
regulated entity." This response came about from substantial
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losses in the portfolios of the Enterprises that amounted to
combined losses of $261 billion from 2007 to the third quarter
of 2011. Additionally, as of December 31, 2011, Treasury has
committed over $183 billion to support the Enterprises.
The key issue raised by this resolution is that the Enterprises
participate in loan modifications via the Home Affordable
Mortgage Program, but FHFA the conservator of the Enterprises
refuses to allow them to engage in principal reduction of loans
in those cases where it might prevent foreclosure.
Much of the debate regarding FHFA refusal to participate in
principal reductions began in correspondence between FHFA and
the United State Congress, House Committee on Oversight and
Government Reform (Committee). In response to a request from
the Committee, FHFA provided an analysis, on January 20, 2012,
of the impact of principal reduction on the performance of loans
in the Enterprises' portfolio. In summary FHFA provided:
In considering a program of principal reduction for
underwater borrowers, FHFA used the net present value
model developed to implement the Home Affordable
Modification Program (HAMP). Using the HAMP NPV model for
borrowers with mark-to-market loan-to-value (LTV) ratios
greater than 115 percent, FHFA compared projected losses
to Fannie Mae and Freddie Mac from borrowers receiving
principal forbearance modifications to borrowers
receiving principal forgiveness modifications as allowed
in the HAMP program. The model, and hence the analysis,
takes into account the sustainability of the
modifications and assumes that principal forgiveness
reduces the rates of re-default on the loans to a greater
extent than would forbearance. However, in the event of a
successful modification, forbearance offers greater cash
flows to the investor than forgiveness. The net result of
the analysis is that forbearance achieves marginally
lower losses for the taxpayer than forgiveness, although
both forgiveness and forbearance reduce the borrower's
payment to the same affordable level.
It is important to note that it appears that the analysis
conducted by FHFA examined the costs associated with principal
writes of all of the Enterprises' loans, not just those where
the borrower could reach a sustainable payment.
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Subsequent to this correspondence, on May 1, 2012, the Committee
sent a letter to FHFA detailing findings that, contrary to
testimony provided by Acting Director Demarco, that Fannie Mae
has examined principal reduction and that their research
revealed that principal reduction would indeed reduce taxpayer
losses on the Fannie Mae portfolio. The overall conclusion of
the letter was that:
Contrary to your testimony, we have now obtained a wide
range of internal documents demonstrating that Fannie Mae
officials conducted detailed, substantive analyses and
concluded years ago that principal reduction programs
have enormous potential to save U.S. taxpayers
significant amounts of money by reducing overall losses
from foreclosures following default.
The core of the disagreement between FHFA and those in favor of
principal reduction is that FHFA has hid behind a financial
analysis of the impact of principal reduction on their fiscal
stability, yet their own analysis implies that the decision to
not do principal reduction was a result of ideological belief,
not the desire to protect taxpayers.
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081
FN: 0004392